Rev.
Proc. 2012-19 separates the accounting method changes into
the following categories:

Deducting repair and maintenance costs and
changing the definition of units of property for
purposes of determining whether amounts have been
expended to improve a unit of property under Temp.
Regs. Sec. 1.263(a)-3T(a)(3).

Changing from a permissible to another permissible
method of accounting for depreciation of MACRS property;

Disposition of a building or structural
component;

Dispositions of tangible
depreciable assets (other than a building or its
structural components);

Dispositions of
tangible depreciable assets in a general asset account;
and

General asset account elections.

Each of the above accounting method changes has
separate detailed rules for implementing it. The changes
share the requirement that the Form 3115, Application for Change in
Accounting Method, be sent to the Ogden, Utah, office instead of the
national office and the requirement to use a single form
when making a concurrent automatic change.

The revenue procedures are effective for tax years
beginning on or after Jan. 1, 2012.

In response to the two revenue
procedures, the IRS issued a Large Business & Industry
(LB&I) Directive for field examinations on the repair
vs. capitalization issue that essentially suspends current
examinations to permit taxpayers to file accounting method
changes under just-issued revenue procedures
(LB&I-4-0312-004).

The IRS notes that the revenue
procedures waive the scope limitations of Rev. Proc.
2011-14, Section 4.02, for a request to change a method of
accounting, which normally apply to a taxpayer under
examination, for taxpayers’ first or second tax year
beginning after Dec. 31, 2011.

For examinations of tax years beginning before Jan. 1,
2012, examiners are instructed to discontinue current exam
activity and not begin any new activity with regard to the
“issues,” which are defined as:

Whether costs incurred to maintain, replace, or
improve tangible property must be capitalized under Sec.
263(a); and

Any correlative issues involving
the disposition of structural components of a building or
dispositions of tangible depreciable assets (other than a
building or its structural components).

The
IRS cautions that, if a taxpayer files a Form 3115 with
regard to the issues on or after Dec. 23, 2011 (the date the
temporary regulations were issued), for a tax year not
covered by the temporary regulations, examiners must
determine, in consultation with the accounting method change
issue group, whether to examine the form.

In
addition, for tax years beginning before Jan. 1, 2012,
examiners are told to:

Withdraw the
portions of Forms 4564,

Information Document Request, that relate to the development of these issues.

Withdraw all Forms 5701, Notice of Proposed Adjustment, related to these issues.

Issue a new Form 5701 with a Form 886-A, Explanation of Adjustments, with language specified in the directive, the
essence of which is that the IRS does not accept or
reject the position the taxpayer took in its return on
these issues; the taxpayer has a two-year period to
adopt the appropriate method of accounting under the
newly issued revenue procedures; if the taxpayer does
not adopt the new method within that time, the taxpayer
may be subject to exam for tax years ending after Dec.
31, 2011, going forward. A copy of this form signed by
the taxpayer must be uploaded into the IRS’s information
management system (IMS).

Retain workpapers on these issues in the IMS.

Complete Form 5426, Examination Information Report.

For tax years beginning after Dec. 31, 2011, and
before Jan. 1, 2014, examiners should determine whether
the taxpayer filed Form 3115. If the taxpayer did, the
examiner should perform a “risk assessment” to determine
whether to examine the form. If the taxpayer did not file
Form 3115, and the period is still open, the examiner must
wait until the period is closed; if the period is closed
in which the taxpayer should have filed, the examiner must
make a “risk assessment” about the issues.

As part of the risk assessment for any Sec. 481(a)
adjustment resulting from the change, the examiner
should:

Consider if the adjustment
properly accounts for amounts paid that were computed
under the taxpayer’s prior method and previously
deducted;

Determine if the
Sec. 481(a) adjustment resulting from any prior year
change was taken into account; and

Consider the accuracy of the Sec. 481(a)
adjustment.

For tax years beginning
after Dec. 31, 2013, examiners must follow the regulations
in effect and follow normal procedures.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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